Rise of Prepaid Electricity Brings Scrutiny

Reflecting the tough economic times, prepaid electricity is on the rise. Long associated with no-contract cellphones and international calling cards, the pay-as-you-go model is rapidly gaining traction among electric utilities that market it as a convenient and affordable option that doesn’t require a deposit, credit check or cancellation fee.

Under prepaid plans, customers pay for service in advance, usually weekly or as needed, based on estimated usage to avoid the sticker shock of monthly bills. The idea has strong appeal among consumers with low incomes or poor credit, including minorities, the unemployed, students and seniors. Prepaid, though, comes with a catch: when account balances reach zero, service is suspended. The specter of power shut-offs that pose a potential safety risk to vulnerable populations has prompted strong opposition from consumer groups and close scrutiny in a few states.

Technology is paving the way. Smart meters deployed in conjunction with newer power grids are easily programmed to enable prepaid billing and remote disconnections. For legacy power grids, meters can be retrofitted or replaced with “advanced” versions that accommodate prepay, with shut-offs handled remotely or by dispatching work crews to residences. Utilities offer a myriad of options for prepay customers to access real-time energy data such as average daily usage and remaining credit. The information can be delivered online, through text messages, e-mail or smartphone apps, or via postcard-sized, in-home displays that plug into electrical outlets.

Supporters tout prepaid service as beneficial to utilities, which always get paid in full and don’t have to devote resources to chasing delinquents, and consumers, who gain through greater control over energy bills and a means to keep costs manageable. “Customers use power more wisely,” says Michael Mendonca, senior director of revenue cycle services at the Salt River Project, a public utility serving Phoenix and central Arizona that operates the nation’s largest prepayment plan. SRP’s 130,000 prepaid customers reduce costs an average twelve percent over traditional billing through increased energy awareness and conservation, he says.

Critics, however, worry that utilities market prepaid service to the poor to avoid offering discount plans and payment-assistance programs. “It’s starting to look like a second-class service that’s devoid of some of the key consumer protections for people who don’t have a lot of money,” complains John Howat, senior policy analyst with the National Consumer Law Center, a Boston-based nonprofit advocacy group that opposes prepay.

In a June report, the NCLC identifies 52 U.S. electric utilities that offer prepaid service, and an additional seven that plan to offer pilot- or full-scale programs. Most are municipal power companies and member-owned cooperatives not subject to state regulation. The report also finds that prepaid electricity is heavily concentrated in the southwest, Arizona, Oklahoma and Texas – states where regulation, according to the center, is weak. Texas permits another class of utilities called “retail electric providers” that sell wholesale energy on a competitive basis to offer the prepaid option.

Marianne Hedin, senior research analyst at Pike Research, a technology analysis firm, and author of a report issued earlier this year on prepaid service, estimates there were 20 million prepaid electric meters worldwide in 2011. She predicts the figure will surpass 23 million this year and grow to 33.6 million in 2017. Global prepaid revenue could reach $1.2 billion this year, projects Pike, part of the business consultancy Navigant. In North America, prepaid meters will expand from 2 million last year to 10 million in 2017, she forecasts.

Now, larger investor-owned utilities are signaling interest. San Diego Gas and Electric is seeking approval by the California Public Utilities Commission of a prepayment plan that would feature a four-day grace period before disconnections and gradual pay-downs of arrears by customers. Howat fears that SDG&E would undermine longstanding commission policies intended to reduce service disruptions. “It troubles me no end,” says Howat, who confesses to losing sleep over the proposal. A commission spokesman directed Governing to a July 26 report issued by the PUC’s Policy and Planning Division that presents a mixed assessment of prepaid’s impact on consumers. A final decision is expected in December.

States taking a cautious approach toward prepay include Iowa, where consumer and civic groups helped stall legislation last year that would have allowed prepaid service with remote disconnects, and Massachusetts, which in 2009 denied a request by the Western Massachusetts Electric Company to offer prepay.

Prepaid utility service has been popular for decades overseas, particularly in Great Britain. Howat says rates are higher in the United Kingdom under prepaid than traditional billing, and that service is “disproportionately concentrated among lower income households.” In the U.S., prepay is either comparable in price to bill-me-later service or slightly higher. Howat notes that hidden expenses, including start-up and equipment costs and transaction fees when payments are made, can raise the overall price tag. Utilities counter that consumers still save through increased conservation efforts.

When balances are close to depletion, consumers are issued warnings that can take several forms (including phone or e-mail alerts) and given a brief window to pay up. If they don’t, service is terminated; a scenario that critics insist could be life-threatening. Utilities emphasize that consumers can easily restore electricity by adding a few dollars to their accounts, and with no reconnection fee. But that might require a short trip, because some utilities only accept payment at kiosks or other public venues, though others allow for online payments. Some utilities won’t terminate service at night, on weekends or holidays, during inclement weather, or if a household member is ill.

SRP makes no exceptions for weather emergencies, but if a customer desperately needs power and can’t leave home or is out of cash, they can call the utility for assistance. To avoid disconnections during emergencies, SRP recommends that money be kept on spare token cards – which are swiped at kiosks and meters to buy electricity – to quickly replenish service. SRP also offers “friendly credit” that maintains power overnight after balances hit zero.

Critics insist that these and other safeguards are insufficient. The National Association of State Utility Consumer Advocates passed a June 2011 resolution that recommends an array of consumer protections, including no shut offs that could jeopardize health or safety, a “reasonable” grace period before disconnections, availability of payment assistance plans and lower rates than traditional service to reflect reduced overhead. In its June report, the NCLC, which helped draft the NASUCA resolution, recommends additional protections, including no participation for the elderly, sick, disabled and families with young children.

Pike Research’s Hedin sees prepaid electricity’s breakthrough from niche to mainstream as inevitable. It will “eventually become prevalent once the [public utility commissions] have satisfied their concerns,” she affirms. Standing in the way are staunch critics such as Howat who view pay-as-you-go as too flawed to salvage. “I don’t see a [prepaid] model that really will cut it,” he said.